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    Crypto Flash Crashes: Things Investors Need to Know

    In 2021 only, Crypto price faced at least 6 flash crashes.

    A cryptocurrency “flash crash” is a phenomenon in which many holders of a particular crypto-asset suddenly decide to sell off, overwhelming the number of buyers, forcing crypto prices to plummet over a period of time. This event differs from the usual crash in that the price tends to recover very quickly, often ending with the price close to its original level.

    The term “flash crash” comes from traditional finance. One of the most famous cases happened in 2010, in which a British trader was arrested for his role in the sudden pullback of the US stock market.

    Last year, Kraken, one of the biggest cryptocurrency exchanges, faced a rapid plunge in the price of Ethereum-based tokens. Across the board, prices fell more than 50%, before fully recovering within an hour. While some experts suggested that a technical glitch could be the reason behind this incident, Kraken CEO Jesse Powell has denied the rumors and said that a single major holder may have “decided to dump his life savings”. It’s possible heavy selling activity could be the work of one large player, but it’s more likely to be many investors moving all at once. 

    Kraken exchange

    Flash crashes can occur beyond human control. They can be generated by algorithmic trading programs, triggering each other to sell in a feedback loop. When such programs are managing large volumes of assets, the consequences of a drop in price are enormous. This can weigh heavily on the futures market and cause a knock-on cascade of liquidations, accelerating the decline in price. A sudden drop can also create great panic, especially for fresh investors as they will move to a more stable and less risky investment. 

    It is almost impossible to give a thorough explanation of a flash crash. Hence, in the aftermath, the crypto media often turn to debate about the culprit or catalyst, as well as making countless theories around this issue.

    A flash crash can be the result of purposely manipulating or cheating in the market from an individual or organization, with large investors known as “whales” employing methods such as stop hunting or creating fake buy/sell walls.

    A flash crash can be the result of “Whales” employing methods such as stop hunting or creating fake buy/sell walls.

    Well-intentioned and well-planned investment strategies can contribute to the “bounce back” after a flash crash. When prices drop suddenly for no apparent reason, investors need to see an opportunity to profit by buying an undervalued asset and capitalizing on it before the opportunity disappears.

    (Reference: Coindesk)

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